Why we like this plan

In 1970, Marian Lucille Herndon McQuade, a West Virginia housewife and mother of 15 children, thought that a special day should be reserved for families to celebrate and spend time with their elderly relatives. In 1978, President Jimmy Carter declared Grandparents Day a national holiday observed on the Sunday after Labor Day. At Savingforcollege.com, we think that September is the perfect month to celebrate grandparents, since it is also recognized as College Savings Month.

With college costs continuing to rise, more and more grandparents are stepping in to ensure that their grandchildren get a chance at higher education. If you’re a grandparent there are a variety of different ways you can help pay for college, but here are eight reasons why we think saving with a 529 plan could be your best bet:

1. You Retain Control of the Assets Throughout the Life of the Account

The 529 account owner, not the beneficiary, has control of the funds until it’s time for college.

For many grandparents, this is an advantage of using a 529 plan versus a UGMA/UTMA custodial account to save for a grandchild’s college education.

You can assure the money will be used for its intended purpose. Savings in a 529 account must be spent on qualified education expenses such as tuition, books and some room and board to avoid incurring income taxes and a 10% penalty on the earnings portion of the withdrawal. (Your contributions will never be taxed or penalized).

2. 529 Plans Are Flexible

529 funds can be withdrawn tax free when used to pay for post-secondary education at any eligible institution. This includes almost any public or private four-year university, and also online programs, foreign schools and trade and vocational programs.

Students who are awarded scholarships or decide to attend a U.S. Military Academy will receive an exception to the 10% penalty rule if they need to make non-qualified withdrawals.

If your grandchild doesn’t end up using the funds in the 529 account, you can easily change the beneficiary to another grandchild or anyone who is planning to attend college without tax consequences.

Many plans also offer age-based investment options, where the plan automatically shifts investments based on the age of the beneficiary so you won’t have to worry about making changes as your grandchild gets closer to college.

4. 529 Plans Offer Greater Growth Potential Than a Taxable Account

Investments like mutual funds will lose a large portion of their earnings to annual income taxes, but earnings in a 529 plan grow federal tax-free.

For example, if you made an initial investment of $5,000 toward your new grandchild’s college education in a mutual funds and made annual contributions of $1,000 for the next 18 years, you would end up with $36,177 after taxes.

With a tax efficient 529 plan, however, you would have $44,177 when it’s time for your grandchild to start college (assuming a 6% annual return for both examples and a 28% federal tax rate for the mutual fund account).

5. You’ll Likely Avoid Gift Taxes and the Kiddie Tax

529 plan contributions fall under the annual gift tax exclusion, so you can put away up to $14,000 per grandchild in 2015 ($28,000 for married couples filing jointly).

In 2015, the "kiddie tax" rule states that if a child has an investment account they do not pay income tax on the first $1,050 earned, and they pay income tax on the next $1,050 at their own (usually low) tax rate. However, any investment income earned over $2,100 will be taxed at their parent’s income tax rate.

Earnings in a 529 plan will avoid federal income tax when withdrawals are spent toward qualified education expenses.

6. 529 Plans Can Be Used As an Estate Planning Tool

Grandparents can reduce their estate tax exposure through making 529 plan contributions, which are considered “gifts” for tax purposes.

While annual gift tax exclusions are currently $14,000 per individual, you can actually deposit up to $70,000 if you elect to treat the contribution as made over a five-year period for gift-tax purposes.

Although the assets will leave your estate, you retain control. However, if you later decide to revoke the account the value will come back to your estate and will be subject to taxes.

8. You Could Also Get a State Tax Break

In addition to lucrative federal state tax benefits, some states also offer tax breaks for residents who invest in their home state’s plan.

Although you are free to invest in almost any 529 plan no matter where you live, your home state may offer state tax deductions or credits for contributions.

Many states also offer special promotions for residents who open accounts during events such as “529 Day” (May 29th) and during the month of September, which is nationally recognized as College Savings Month.

In 1970, Marian Lucille Herndon McQuade, a West Virginia housewife and mother of 15 children, thought that a special day should be reserved for families to celebrate and spend time with their elderly relatives. In 1978, President Jimmy Carter declared Grandparents Day a national holiday observed on the Sunday after Labor Day. At Savingforcollege.com, we think that September is the perfect month to celebrate grandparents, since it is also recognized as College Savings Month.

With college costs continuing to rise, more and more grandparents are stepping in to ensure that their grandchildren get a chance at higher education. If you’re a grandparent there are a variety of different ways you can help pay for college, but here are eight reasons why we think saving with a 529 plan could be your best bet:

1. You Retain Control of the Assets Throughout the Life of the Account

The 529 account owner, not the beneficiary, has control of the funds until it’s time for college.

For many grandparents, this is an advantage of using a 529 plan versus a UGMA/UTMA custodial account to save for a grandchild’s college education.

You can assure the money will be used for its intended purpose. Savings in a 529 account must be spent on qualified education expenses such as tuition, books and some room and board to avoid incurring income taxes and a 10% penalty on the earnings portion of the withdrawal. (Your contributions will never be taxed or penalized).

2. 529 Plans Are Flexible

529 funds can be withdrawn tax free when used to pay for post-secondary education at any eligible institution. This includes almost any public or private four-year university, and also online programs, foreign schools and trade and vocational programs.

Students who are awarded scholarships or decide to attend a U.S. Military Academy will receive an exception to the 10% penalty rule if they need to make non-qualified withdrawals.

If your grandchild doesn’t end up using the funds in the 529 account, you can easily change the beneficiary to another grandchild or anyone who is planning to attend college without tax consequences.

Many plans also offer age-based investment options, where the plan automatically shifts investments based on the age of the beneficiary so you won’t have to worry about making changes as your grandchild gets closer to college.

4. 529 Plans Offer Greater Growth Potential Than a Taxable Account

Investments like mutual funds will lose a large portion of their earnings to annual income taxes, but earnings in a 529 plan grow federal tax-free.

For example, if you made an initial investment of $5,000 toward your new grandchild’s college education in a mutual funds and made annual contributions of $1,000 for the next 18 years, you would end up with $36,177 after taxes.

With a tax efficient 529 plan, however, you would have $44,177 when it’s time for your grandchild to start college (assuming a 6% annual return for both examples and a 28% federal tax rate for the mutual fund account).

5. You’ll Likely Avoid Gift Taxes and the Kiddie Tax

529 plan contributions fall under the annual gift tax exclusion, so you can put away up to $14,000 per grandchild in 2015 ($28,000 for married couples filing jointly).

In 2015, the "kiddie tax" rule states that if a child has an investment account they do not pay income tax on the first $1,050 earned, and they pay income tax on the next $1,050 at their own (usually low) tax rate. However, any investment income earned over $2,100 will be taxed at their parent’s income tax rate.

Earnings in a 529 plan will avoid federal income tax when withdrawals are spent toward qualified education expenses.

6. 529 Plans Can Be Used As an Estate Planning Tool

Grandparents can reduce their estate tax exposure through making 529 plan contributions, which are considered “gifts” for tax purposes.

While annual gift tax exclusions are currently $14,000 per individual, you can actually deposit up to $70,000 if you elect to treat the contribution as made over a five-year period for gift-tax purposes.

Although the assets will leave your estate, you retain control. However, if you later decide to revoke the account the value will come back to your estate and will be subject to taxes.

8. You Could Also Get a State Tax Break

In addition to lucrative federal state tax benefits, some states also offer tax breaks for residents who invest in their home state’s plan.

Although you are free to invest in almost any 529 plan no matter where you live, your home state may offer state tax deductions or credits for contributions.

Many states also offer special promotions for residents who open accounts during events such as “529 Day” (May 29th) and during the month of September, which is nationally recognized as College Savings Month.